Building Replacement Insurance, what are you covered for?

What is Building Replacement Insurance?

Building Replacement Insurance is the amount an insurer will pay for the cost of replacing or repairing your home to its current condition (up to the policy’s limit) in cases of damage resulting from any number of incidents or natural disasters.

The policy limit should not only include the current cost to rebuild the property “new for old” (often much greater than the building’s worth) but also current costs for demolition, redesign, tendering and the escalation of rebuilding costs from policy renewal through to the time of reconstruction.

Are you protected?

After watching the devastating floods in Queensland and Northern New South Wales that ravished these states leaving so many Australians homeless and without personal possessions begs the question, do they have insurance. In some cases no, but probably even more disturbing is the people that did have insurance and were confronted with the fact that they were severely under-insured for the replacement of their homes and property.

As a result of the bushfires in Melbourne and Canberra many years ago, the Australian Securities and Investments Commission prepared a report on under-insurance in Australia. The report determined that the level of under-insurance in regard to building replacement in Australia is very high and in surveys conducted at that time, it was suggested that between 27% and 81% of consumers were under-insured by 10% or more against current re-building costs.

Insurance Council of Australia surveys concluded that in the matter of building valuations some 24% of buildings are severely under insured (under 70% of replacement value) and a further 26% were significantly underinsured (under 90% of replacement value). In the case of plant & equipment the conclusion was 50% were severely underinsured and a further 40% significantly underinsured.

An understanding of the consequences of under insurance in the event of loss is important to a company or individuals welfare. Nearly every insurance policy includes a co-insurance or average condition to cover situations where property is under insured. In simple terms, if property is insured for less than its true value at risk at the time of the loss, only a proportional part of the proved loss will be paid. This will still apply in the case where the amount of the loss is much lower than the insured sum.

Building Costs

There are organisations that regularly complete research on building construction costs for all property types in all major capital cities within Australia. From this research, we can see that since 2005 the Consumer Price Index has risen in each major city at a rate of 0.61% to 5.63% per annum, but over the corresponding period Building Construction Index has escalated at a rate of 0.99% to 12%.

This increase in Building Construction Costs is substantial when compared to that of the Consumer Price Index and could mean that homes insured at replacement cost in the past 10 years that have only allowed for an annual CPI increase are at serious risk of being grossly underinsured.

Web-based Estimate Calculators

Many insurers now help customers estimate rebuilding costs by providing them with access to web based calculators.  ASIC also conducted an assessment on these calculators which produced the following results.

(Source: Under-Insurance Report, Australian Securities and Investments Commission, 2005)

ASIC determined that rebuilding cost estimates from 4 separate insurers varied wildly.  Estimates ranged from $349,265 by Insurer A (using the elemental estimating method) to $155,040 by Insurer D (using the cost per square metre method), a difference of $194,225 or 125%!

Conclusion: Web based calculators can be helpful for estimating purposes but they can leave you exposed to the risk of being heavily under-insured.  There is no substitute for an Insurance Replacement Cost Estimate prepared by a qualified professional.

What should you do?

The regular re-valuing of a building’s replacement cost (also referred to as a Building Insurance Valuation) is often forgotten or ignored.  With regularly fluctuating building costs it is critical to keep the replacement value and insurance valuation of your property up to date, no matter what the age of the property.

Protecting your home and/or investments with an accurate building insurance replacement valuation is vital. A Quantity Surveyor or a Valuer can assist you by calculating the appropriate insurance value not only for the cost to rebuild the property new for old (often much greater than the building’s worth), but also current costs for demolition, redesign, tendering costs, and escalation in rebuilding costs from policy renewal through to the time of reconstruction.